Hashem Oghli is a manufacturer of plastic products. Unfortunately, one of the moulding machines is out...

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Finance

Hashem Oghli is a manufacturer of plastic products.Unfortunately, one of the moulding machines is out of order andneeds to be replaced.
After receiving quotes from various suppliers, you find twotypes of moulding machines that are suitable. Type A mouldingmachine is a high-end machine; it has a higher purchase price butmakes higher quality products that sell better on the market andbring more revenue. Type B moulding machine is lower-end; it ischeaper, but produces lower quality products and higher scraps thatrequire rework. In addition, this machine produces lessenvironmental pollution, therefore due to governmental program,this machine is tax exempt.
Hashem Oghli's managment asks you to evaluate these machines andrecommend the best one. Cost structures of the two types are givenbelow:
Type A machine:
Purchase price = $100,000
Salvage value = $20,000
Yearly revenue = $60,000
Yearly maintenance cost = $15,000
Yearly cost of scrap = $5,000
Type B machine:
Purchase price = $15,000
Salvage value = $0
Yearly revenue = $40,000
Yearly maintenance cost = $15,000
Yearly cost of scrap = $15,000
It is expected that both machines depreciate fast and will haveto be replaced after three years (the company uses straight linedepreciation method).
The company is using a discount rate of 6%. The tax rate formachine A is 10% and for machine B is 0%. (Note that neither choicewould impact working capital.)
Below, you can find the incremental income statement for buyingmachine Type A. However, you can derive the incremental statementfor Type B machine by replacing the relevant values. Note that theoperating expense includes cost of maintenance and scrapproduction.
Annual Income Statement Item Y1 Y2 Y3
Revenue $ 60 $ 60 $ 60
Operating Expenses:
Maintenance $ (15) $ (15) $ (15)
Scrap Production $ (5) $ (5) $ (5)
Earnings Before Interest, Taxes, Depreciation and Amortization(EBITDA) $ 40 $ 40 $ 40
Depreciation ? ? ?
Earnings Before Interest and Taxes (EBIT) ? ? ?
Taxes ? ? ?
Net Operating Income After Tax ? ? ?
Note: all values are in thousand dollars. Use one decimal pointprecision in your calculations and answers.
Your task is to analyze the financial performance of the twooptions over three years and compare them. Answer the followingquestions.
A) What is the Net Present Value (NPV) for Type A machine?
B) What is the Net Present Value (NPV) for Type B machine?

Annual Income Statement Item	Y1	Y2	Y3
Revenue	$ 60	$ 60	$ 60
Operating Expenses:
Maintenance	$ (15)	$ (15)	$ (15)
Scrap Production	$ (5)	$ (5)	$ (5)
Earnings Before Interest, Taxes, Depreciation and Amortization(EBITDA)	$ 40	$ 40	$ 40
Depreciation	?	?	?
Earnings Before Interest and Taxes (EBIT)	?	?	?
Taxes	?	?	?
Net Operating Income After Tax	?	?	?

Answer & Explanation Solved by verified expert

4.0 Ratings (550 Votes)

A NPV of Type A machine 202516 Formula Annual Income Statement Item Y1 Y2 Y3 Year n 1 2 3 Revenue R 60000 60000 60000 Operating Expenses OE Maintenance 15000 15000 15000 Scrap Production 5000 5000 5000 ROE Earnings Before Interest Taxes Depreciation and Amortization EBITDA 40000 40000 40000 Straight line over 3 years Purchase See Answer

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Transcribed Image Text

Hashem Oghli is a manufacturer of plastic products.Unfortunately, one of the moulding machines is out of order andneeds to be replaced.After receiving quotes from various suppliers, you find twotypes of moulding machines that are suitable. Type A mouldingmachine is a high-end machine; it has a higher purchase price butmakes higher quality products that sell better on the market andbring more revenue. Type B moulding machine is lower-end; it ischeaper, but produces lower quality products and higher scraps thatrequire rework. In addition, this machine produces lessenvironmental pollution, therefore due to governmental program,this machine is tax exempt.Hashem Oghli's managment asks you to evaluate these machines andrecommend the best one. Cost structures of the two types are givenbelow:Type A machine:Purchase price = $100,000Salvage value = $20,000Yearly revenue = $60,000Yearly maintenance cost = $15,000Yearly cost of scrap = $5,000Type B machine:Purchase price = $15,000Salvage value = $0Yearly revenue = $40,000Yearly maintenance cost = $15,000Yearly cost of scrap = $15,000It is expected that both machines depreciate fast and will haveto be replaced after three years (the company uses straight linedepreciation method).The company is using a discount rate of 6%. The tax rate formachine A is 10% and for machine B is 0%. (Note that neither choicewould impact working capital.)Below, you can find the incremental income statement for buyingmachine Type A. However, you can derive the incremental statementfor Type B machine by replacing the relevant values. Note that theoperating expense includes cost of maintenance and scrapproduction.Annual Income Statement ItemY1Y2Y3Revenue$ 60$ 60$ 60Operating Expenses:Maintenance$ (15)$ (15)$ (15)Scrap Production$ (5)$ (5)$ (5)Earnings Before Interest, Taxes, Depreciation and Amortization(EBITDA)$ 40$ 40$ 40Depreciation???Earnings Before Interest and Taxes (EBIT)???Taxes???Net Operating Income After Tax???Note: all values are in thousand dollars. Use one decimal pointprecision in your calculations and answers.Your task is to analyze the financial performance of the twooptions over three years and compare them. Answer the followingquestions.A) What is the Net Present Value (NPV) for Type A machine?B) What is the Net Present Value (NPV) for Type B machine?